Peter Gulia

30Rock, if the employer and the executive meant the plan to be unfunded, the employer alone should have all of the rights under the annuity contract. If the participant has a right that could restrain the employer's use of an annuity contract that was meant to be the employer's sole property, your client might need advice about different issues.

A hypothetical employer is content to use its recordkeeper’s “pre-approved” prototype plan with one revision: The employer adds a provision mandating that, in addition to other investment alternatives that the plan administrator selects in its discretion, each of six mutual funds (specified by name) is a designated investment alternative that no plan fiduciary has power to remove (except to the extent that ERISA § 404(a)(1) requires the fiduciary to disobey the plan’s terms). The employer wonders whether this one revision, which doesn’t seem to affect any § 401(a) qualification requirement, results in losing reliance on the prototype’s opinion letter. Revenue Procedure 2005-16 includes the following provisions: [19.02] Nonstandardized M&P Plans and Volume Submitter Plans — An employer adopting a nonstandardized M&P … plan may rely on that plan’s opinion … letter as described below if the employer’s plan is identical to an approved M&P … plan with a currently valid favorable opinion letter, the employer has chosen only options permitted under the terms of the approved plan, and the employer has followed the terms of the plan. Also see section 19.03(3) below. These employers can forego filing Form 5307 and rely on the plan’s favorable opinion … letter with respect to the qualification requirements, except as provided in [other conditions not relevant to this query]. [19.03(3)] An adopting employer can rely on an opinion … letter only if the requirements of this section 19 are met, and the employer’s plan is identical to an approved M&P … plan with a currently valid favorable opinion … letter; that is, the employer has not added any terms to the approved M&P … plan and has not modified or deleted any terms of the plan other than choosing options permitted under the plan or, in the case of an M&P plan, amended the document as permitted under section … 5.09[.] [5.09] Adopting Employer Modification of Trust or Custodial Account Document — An employer that adopts a nonstandardized M&P plan will not be considered to have an individually designed plan merely because the employer amends administrative provisions of the trust or custodial account document (such as provisions relating to investments and the duties of trustees), provided the amended provisions are not in conflict with any other provision of the plan and do not cause the plan to fail to qualify under § 401(a). For this purpose, an amendment includes modification of the language of the trust or custodial account document and the addition of overriding language. What do the experts think, may the employer still rely on the prototype’s opinion letter? Or should the employer submit Form 5307?

Peanut Butter Man, thank you for adding some further thoughts (with rule text to support them). Now that we've uncovered that BenefitsLink readers think that a practitioner must provide a client advice about defects even if the client didn't ask for (and might not welcome) that advice, let's ask ourselves a follow-on question: must a client pay for the advice it didn't ask for? What if a practitioner adds to her engagement letter the following: Despite our agreement generally that I’ll provide only the advice you ask for, I may render the advice that any applicable law requires me to render, and you must pay for that advice (despite the fact that you didn't ask for it, and even if the advice is useless to you). You're obliged to pay for this required advice at the rate of $nnn per hour. Leaving aside the practical problem that a client might be unlikely to pay no matter what the written agreement says, is such a clause is fair? BenefitsLink mavens, what do you think?

Here's a related question for lawyers, consultants, and others who provide services in which some work is for the plan's administration and some work is for the employer's interest (other than as a plan fiduciary): If a client asks you to categorize or allocate your bill to mark which services, in your opinion, may be paid from plan assets, do you provide that service? If not, why not? If you allocate your bill between plan and employer expenses, do you have reservations about the risks of rendering the implied opinion that underlies the allocation? How do you manage those risks? Do you charge your client for the time it takes you to analyze which services may be paid from plan assets?

Let's see whether we understand the facts: The employer seems to be not only the plan's sponsor but also the plan's administrator. Someone believes that at least a portion of the lawyer's services were for the plan's administration (rather than for the employer's interests other than as a plan fiduciary). A plan fiduciary (perhaps someone of the plan's administrator{?}) allocated the lawyer's bill between employer and plan expenses, and gave an instruction to reimburse the employer for amounts that the employer had advanced to pay what the fiduciary decided were the plan's expenses. If this is the situation, doesn't the plan's administrator already know the amounts to be reported as the lawyer's compensation paid by the plan? Also, this isn't indirect compensation; it's direct compensation. Indirect compensation looks for a situation in which a third person pays the plan's expense. In reading the definition of direct compensation [page 22 in the Form 5500 instructions], the negative implication of that paragraph's last sentence is that a payment made by the plan's sponsor and reimbursed by the plan results in direct compensation. And although it isn't authoritative, the FAQ states a similar view: Q37: If a plan sponsor pays a third-party service provider on the plan's behalf and seeks reimbursement from the plan, should the Schedule C reflect a direct payment from the plan to the service provider and not a payment to the employer? Yes. When a plan sponsor pays a plan third-party service provider and then seeks reimbursement from the plan, the Schedule C for the plan should reflect a direct payment from the plan to the service provider. In this regard, direct compensation is defined in the instructions for purposes of Schedule C as ”[p]ayments made directly by the plan for services rendered to the plan or because of a person's position with the plan” and excludes ”[p]ayments made by the plan sponsor, which are not reimbursed by the plan . . . .” The Department notes that if the plan sponsor pays a service provider directly, and does not seek reimbursement from the plan, such payment does not need to be reported on the Schedule C. http://www.dol.gov/ebsa/faqs/faq_scheduleC.html The law firm is a service provider. When a lawyer rendered advice about that plan's administration (rather than the employer's interests other than as a fiduciary), the law firm became a service provider.

Thank you for the responses. It seems that an employer might use plan design (without using information identifiable to an individual) to help motivate higher-cost workers to get coverage outside the employer-sponsored plan. During World War II wage controls, there was some efficiency value for an employer to provide some compensation in a form other than money wages. Perhaps the markets for health coverage might result in an efficiency in the opposite direction with some workers.

The linked-to paper argues that health coverage reform sets up incentives for an employer to design its “self-insured” group health plan to motivate those who consume more medical care than others to prefer individual insurance over employment-based coverage. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1651308 Do you think that the authors’ theory is realistic? The authors suggest that one inducement for an employee (and his or her family) to leave an employment-based plan might be the employer’s cash-wages payment in an amount somewhat more (recognizing some tax differential) than what would have been the employer’s “contribution” to the employment-based health plan. [Pages 22-23 of the paper, pages 23-24 of the .pdf] Is this realistic? If an employer were to offer such a cash-wages payment, would the choice run into constructive-receipt issues? Or would Section 125 protect those who chose the group health coverage as not having had constructive receipt of the available but not-taken cash payment?

While I’m unaware of any court decision on your query under ERISA § 404©, here’s two quick thoughts that might help you prepare to get your lawyer’s advice about whether a participant’s lack of a language ability might unravel an otherwise good ERISA § 404© defense. The general rule on when a summary must mention foreign-language assistance turns on whether a plan covers a particular number of participants who “are literate only in the same non-English language[.]” Whether information about ERISA § 404© and investment alternatives is included in, or furnished apart from, a summary, what matters is whether the directing person reads a language, not whether he or she speaks the language. Many people speak, but don’t read, English. If U.S. laws treated as ineffective a written warning or disclosure in English given to a person who doesn’t read any language, what would an employer do to deliver an effective warning or disclosure? Did Congress in 1974 intend that a plan fiduciary should be unable to get relief from a participant’s claim because the participant doesn’t read any language? Despite those observations, a plan fiduciary might consider carefully what non-English language assistance is prudent and reasonable to provide. Among other steps, a plan fiduciary might consider a notice and some assistance in the non-English language if the plan administrator knows or has reason to believe that a significant number of participants are literate only or primarily in the same non-English language.

The linked-to paper argues that health coverage reform sets up incentives for an employer to design its “self-insured” group health plan to motivate those who consume more medical care than others to prefer individual insurance over employment-based coverage. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1651308 Do you think that the authors’ theory is realistic? The authors suggest that one inducement for an employee (and his or her family) to leave an employment-based plan might be the employer’s cash-wages payment in an amount somewhat more (recognizing some tax differential) than what would have been the employer’s “contribution” to the employment-based health plan. [Pages 22-23 of the paper, pages 23-24 of the .pdf] Is this realistic? If an employer were to offer such a cash-wages payment, would the choice run into constructive-receipt issues? Or would Section 125 protect those who chose the group health coverage as not having had constructive receipt of the available but not-taken cash payment?

I’d like to learn more about what TPAs and recordkeepers do in processing distributions under a retirement plan that includes Roth and non-Roth amounts. Do you permit a participant (or a beneficiary) to specify his or her preference on which portion of a distribution is taken from Roth amounts? Do you require a claimant to direct an allocation between Roth and non-Roth amounts? For example, I have a client that’s considering whether its plan documents should specify that a claim will be denied unless the claim specifies the claimant’s allocation between Roth and non-Roth amounts. If a participant isn’t permitted or fails to specify a preference, what ordering rule do you use to allocate a distribution between Roth and non-Roth amounts? What were your reasons for choosing that ordering rule? How much of the ordering rules is in the plan document, and how much is the plan administrator’s interpretation? Is there any particular kind of distribution for which you don’t permit a claimant to request his or her preferred allocation between Roth and non-Roth amounts? If so, why do you preclude the choice? If a qualified domestic relations order doesn’t state details on which portion of the alternate payee’s portion is to be credited as Roth amounts, what ordering rule do you use? Is that rule stated in the plan document? Stated in the QDRO procedure? A rule you interpret for practical administration?

Those who think that the IRS might be overreaching in regulating tax preparers (and I don't express a view) might want to read your neighbors’ reactions to my not-so-hypothetical in “Must a Form 5500 preparer tell her client that the plan is tax-disqualified?” http://benefitslink.com/boards/index.php?s...c=46333&hl=

I based the hypothetical on a real situation, but with some facts varied to further protect my client’s (and her prospective client’s) confidences and to sharpen the tensions involved in similar situations. (As some of my friends know, a significant part of my law practice is advising a lawyer, actuary, or certified public accountant about his or her professional conduct.) In the real situation, the practitioner had not yet accepted the Form 5500 engagement, but through her procedures for vetting prospective clients already had knowledge of the plan-document defects. I posted the hypothetical after I had advised my client, hoping to learn whether my advice was or wasn't consistent with community norms. Moreover, I believe that the problem illustrated by the hypothetical is frequently recurring, at least for those who work with small-business employers. What did I advise? Although my client asked about using her engagement letter to limit sharply the scope of the representation, I advised that the expense, delay, and difficulty of getting the prospective client’s informed consent to such a scope limit would be disproportionate to the nature and normal fee of the proposed Form 5500 engagement. (Although this client has no professional credentials, my general advice to her is to follow conduct principles and 31 C.F.R. Part 10 as though she belonged to a recognized profession.) After my client told me that she was certain that the business owner would refuse to correct the plan documents, I suggested that she politely decline to accept the proposed engagement.

A somewhat related question: Do some of the businesses that do a "dependent eligibility audit" do so on a contingency fee; for example, $yy multiplied by the number of ineligible persons removed?

Thank you everyone for a nice collection of useful ideas.

rcline46, thank you for helping me think about a business-conduct problem. When you refer to a duty even if law doesn't impose a requirement, do you mean a moral duty or something else? Does it matter that this practitioner might not be an actuary, lawyer, or certified public accountant, and might not have any license or credential? Would it affect your view if the engagement letter had stated explicitly that the practitioner would not do anything beyond what's absolutely necessary to prepare the Form 5500? Please understand that I also think that the practioner must mention the defect, but I seek to understand more about why we feel that way.

I’d like to know what the BenefitsLink mavens think about this hypothetical: A corporation (100% owned by one shareholder) engages a practitioner to prepare a small retirement plan’s Form 5500. The plan has never had an audit or any level of CPA service concerning the plan’s financial statements. For every previous Form 5500, the financial reporting was on the cash-receipts-and-disbursements method of accounting. The practitioner’s engagement letter says that she may rely on information furnished by the employer or any financial institution unless she has actual knowledge that the information is false. Although the practitioner didn’t ask for it, the corporation furnishes to the practitioner a copy of the plan’s document. Against good business judgment, the practitioner doesn’t send it back with a letter saying that she didn’t look at the document. Rather, she does glance at it, and immediately notices that the document hasn’t been amended for several law changes that were required to be in the plan’s document before the year to be reported. Based on the plan’s financial information and consistently using the cash method of accounting, it’s possible to answer truthfully every required item of Form 5500 without ever mentioning that the plan isn’t tax-qualified. The practitioner would prefer not to say to her client that the plan is tax-disqualified. Why? She believes that mentioning the point would lead to unbillable telephone time with the client’s owner. Leaving aside the wisdom of the practitioner’s reluctance even to mention what she noticed, is there any Treasury department rule or other Federal law that makes it improper for her to prepare the Form 5500 without mentioning the tax-qualification defect?

On the query about whether a son is or isn't some kind of "dependent", the new rule says: Restrictions on plan definition of dependent. With respect to a child who has not attained age 26, a plan or issuer may not define dependent for purposes of eligibility for dependent coverage of children other than in terms of a relationship between a child and the participant. Thus, for example, a plan or issuer may not deny or restrict coverage for a child who has not attained age 26 based on the presence or absence of the child's financial dependency (upon the participant or any other person), residency with the participant or with any other person, student status, employment, or any combination of those factors. In addition, a plan or issuer may not deny or restrict coverage of a child based on eligibility for other coverage, except that paragraph (g) of this section provides a special rule for plan years beginning before January 1, 2014 for grandfathered health plans that are group health plans. (Other requirements of Federal or State law, including section 609 of ERISA or section 1908 of the Social Security Act, may mandate coverage of certain children.) On risking the hazards and inconvenience of litigation, there might not be a much better way to get a conclusion (if anyone challenges a denial). The plan administrator's lawyer will read the same statute, interim rule, and other law sources that Chaz and the rest of us read. Uncertainty about the right answer to a question isn't a sufficient reason for failing to decide a properly presented question. The alternative of not taking any risk on failing to offer coverage to adult children could mean taking a risk of harming the plan by providing coverage and payment methods that need not have been provided and in so doing worsening costs or benefits for everyone else. If not required by the plan's documents, risking those harms might be a fiduciary breach. A plan administrator's task often involves interpreting ambiguous law. That's why courts defer to an administrator's interpretation unless it was so obviously wrong that it must have been an abuse of discretion.

On Chaz's hypo, perhaps the plan's administrator might send son a claims-denial letter that explains the administrator's discretionary interpretation of the plan that only an employee may pay (and only by wage reduction) for the non-employer portion of any cost of coverage. This claims-denial letter would describe the plan's procedure for review of a denied claim. If the son seeks review, the next denial would explain that he has ehausted the plan's claims and review procedures (and so may sue in Federal court). One imagines that the probabilities are against son finding a lawyer who would successfully argue that the administrator's interpretation was an abuse of discretion.

Even if the target is confident that she could prove that she isn't and wasn't an administrator, is it possible that she was a trustee (or otherwise was a fiduciary)? Did the corporation's shareholder (and, one guesses, a director) have power to appoint or remove the administrator, arguably making the shareholder a fiduciary to the extent of that power? If the DoL could find any fact to argue that the target is or was a fiduciary, imagine that the DoL could argue that a fiduciary who has knowledge of a co-fiduciary's (the administrator's) breach has duties to take prudent steps to correct or remedy the co-fiduciary's breach. bzorc, I have some suggestions (turning on where the facts lead) on steps that the target's lawyer could take to persuade EBSA to withdraw its demand. For tactical reasons, it's unwise to show the ideas on a public website that anyone (including government people) could read. Please feel free to call me

Even if one assumes that the investment house is wrong: If the investment house furnishes the prototype documents without a separate or incremental fee, might the business owner's expense in adopting a revision be relatively modest? If there are several clients in the same situation with the same documents set, perhaps a practitioner could allocate his or her reading time among the clients so as to bill each only an allocable portion of that time, plus the advising and hand-holding time that's particular to each client. Shouldn't a practitioner prefer that a client make its choice about whether it wants whatever arguable protection could be gotten from doing the revised documents. Conversely, in the absence of an IRS determination letter or clear reliance on a prototype, it might be troublesome for a practitioner to assure a client that an absence of a revision couldn't lead to a disqualification.

My suggestion is based on an assumption that the business owner prefers to file Form 5500-EZ on old-fashioned paper. In my limited experience, a paper filing not only reduces what information gets into the computers but also slows down the agency's processing of the return. I've handled situations in which a taxpayer, even after responding to a specific deficiency notice, never heard from the IRS again - thus practically escaping several years' penalties.

The fillable .pdf form on the IRS website allows typing dates in the first line. In the clean-up situation that you describe, I'd use 2009 forms for the old years' returns.

I’d be reluctant to advise a client to omit any year’s return based on a statute-of-limitations presumption. For the plan’s trust, it’s the act of filing a Form 5500 (including Schedule P for those years that called for it) that starts the running of the statute of limitations. Neither a three-year nor a six-year limitations period applies if the trustee hasn’t filed a return. IRC § 6501©(3). [With the right facts and circumstances, it’s possible for a trustee’s Form 5500 that omitted a Schedule P to start running a limitations period. See Martin Fireproofing Profit Sharing Plan and Trust v. Commissioner, 92 T.C. 1173 (1989). But I don’t know how one does it without any return at all.] A client might consider omitting a year’s Form 5500 if she knows, or in good faith estimates, that plan assets were less than $250,000 or $100,000 at the relevant time. But despite that reporting relief, many plan trustees feel more comfortable filing a return to trigger the running of limitations periods. Once a trustee (with the work of her trusty CPA) is reconstructing enough of the plan’s and trust’s records to file Form 5500 for some of the years, it’s not too much more work to pull together returns for all years. Moreover, looking at the year-to-year internal consistency of the whole timeline can be a practical way to spot errors or illogical estimates. If the records are incomplete, I’d focus more energy on making the contribution numbers consistent with those shown in the business and individual tax returns. Along with this, I’ve seen returns in which the beginning and ending balances were disclosed as estimates, and the year’s investment gain or loss likewise was disclosed as an estimate interpolated as a subtraction of the contributions and the estimated beginning balance from the estimated ending balance.

Understand the reasons for a service provider to get rid of the beneficiary designations. My further thinking-out-loud is about whether a service provider should or shouldn't present a particular suggestion on how the plan administrator keeps the records. For the plan administrator that must keep the beneficiary designations, might there be a better filing system than putting the beneficiary designations mixed in with employer records that aren't the retirement plan's records and are likely to have different retention times? Is this at least a question that the plan administrator must or should evaluate? A service provider that isn't a plan fiduciary usually doesn't have a duty to give uncompensated advice to the plan administrator. But could a send-'em-back letter suggest that the plan administrator ask for its employee-benefits lawyer's advice about how to keep plan records? Would such a suggestion, even if ignored, be a stronger defense for a service provider than a volunteered too-specific suggestion? Or is there a business problem that a service provider's client will be offended by a suggestion that it might need or want advice about how to keep plan records?

Bill Presson's and austin3515's ideas that a service provider might prefer not to have possession of records (and get rid of any that are unwelcome) make sense (at least for a business that chooses not to provide a service of checking the internal consistency of the beneficiary designations). Should we be concerned that putting a retirement plan beneficiary designation in the participant/employee's personnel file (if someone doesn't render more guidance) might result in mistakenly destroying the record sooner than ERISA permits, and possibly sooner than the record could be needed to decide a claim to a death benefit? Many employers destroy a personnel file about four years after the former employee's employment ended. Because a retirement plan might not require a beneficiary to take a death benefit until five years after the participant's death, could a beneficiary designation that's amid a whole personnel file get scrapped before the retirement plan's administrator needs to look at that record?